Japan inflation outlook spurs BoJ rate talk

The Bank of Japan said on Friday it expected inflation to pick up over the next two years on the back of steady economic growth, reinforcing expectations that it may end an era of zero interest rates as early as in July.
If prices and the economy continue to firm as expected, the central bank should adjust monetary policy accordingly, BoJ Governor Toshihiko Fukui told a news conference after the bank unveiled its forecasts in a twice-yearly economic outlook report.
Underscoring the shift in the BoJ's focus to inflation from deflation, which had kept it occupied for most of the last seven years, consumer price data earlier in the day showed nation-wide inflation stayed at its highest in eight years in March, with advance April data for the Tokyo area pointing to further rises.
"It is very important to see whether the economy moves in line with our main scenario," Fukui told a news conference.
"If it were to move in that direction we could secure a more desirable path for the economy if we adjust rates in a natural manner," he said.
The semi-annual report showed that the nine BoJ board members' "majority" forecasts - which exclude the highest and lowest - centred on a rise of 0.8 percent for the core consumer price index in the fiscal year starting next April.
The forecast rate was much higher than a 0.1 percent actual rise in fiscal 2005/06 and the board's median forecast for a 0.6 percent rise in the current fiscal year which began this month.
The board also forecast Japan's economy to grow 2.4 percent in the current fiscal year and 2.0 percent in the following year.
The economy grew at an annualised rate of 5.4 percent in the final three months of last year. Growth data for the January-March quarter is due out next month.
The forecasts matched market expectations and added fuel to talk that the BoJ could begin raising interest rates for the first time in six years as early as July.
"In short, the conditions are falling in place for the BoJ to end the zero-rate policy," said Masaaki Kanno, chief economist at J.P. Morgan Securities.